The Start-Up Diaries: Plan B-Minus

His business plan didn't make the grade, but Johann Verheem gets high marks for vision

On a warm evening last June, a couple walked the beach in the affluent San Diego suburb of Del Mar, finding their way by the soft light streaming from the seaside homes. Johann and Emmarance Verheem, both 33, conversed calmly in their native Afrikaans, deciding whether they should embark on a new adventure.

Married for eight years, the couple had left family and friends behind in South Africa to seek a new life in America. The Verheems had done well. Emmarance was a pharmacist now. Johann, director of product development for infomercial giant Guthy-Renker Inc., was earning an income in the low six figures. In a few months he would graduate from the M.B.A. program at San Diego State University (SDSU). And the couple were just about to have their first child. Now they were deciding whether Johann should leave his good job and start his own company.

The idea of risking his livelihood for a start-up play made Verheem quite apprehensive. His employers at Guthy-Renker were making it even tougher by sweetening his package to persuade him to stay. There was a new contract offer from them sitting on his desk as he and Emmarance talked. More money. A piece of the action, at long last. How could he leave?

On the other hand, if he didn't take the plunge now, when would he? Plenty of friends and colleagues had told Verheem he should do it. One of the most vocal was Alex De Noble, director of academic programs at SDSU's Entrepreneurial Management Center and Verheem's favorite management professor. Earlier that same day, De Noble, an enthusiastic personality with a directness in keeping with his New Jersey roots, had called and urged Verheem to make up his mind. The message was simple: For cryin' out loud, Johann! Let's go!

"I'll tell you what, Alex," Verheem answered. "I'll make a decision tonight." So husband and wife walked the sands, and the next morning Verheem gave De Noble the good news. He was going for it. De Noble was ecstatic. A pennant for his beloved Yankees couldn't have made him happier. "All right!" he cheered.

Soon afterward, De Noble took Verheem to an awards dinner for local entrepreneurs. As the winners stood up one by one and told war stories about their start-ups, De Noble could see the excitement build in Verheem's eyes. Inspired, student turned to professor and said, "You know what? I made the right decision."

Verheem's venture, called Application Technologies (AT), is a real "not-com" -- the company develops and licenses new packaging products. Or at least it will soon. Right now its focus is on a simple concept that Verheem hopes will be the biggest thing since the plastic pump bottle.

Called the Appli-K pouch, it is an easy-to-manufacture, one-application container. The pouch is a pillow-shaped sealed container formed from Mylar or foil or other materials, depending on the product it is intended to dispense. It can be made in different sizes to contain a fraction of an ounce to a quarter pound or more of liquid, gel, or cream. A consumer peels two sealed flaps back over the pouch to open it, then squeezes. The flaps protect his or her fingers, so skin medication or lotion can be applied without touching the product, bruise, or blemish.

Verheem's plan is to form strategic partnerships with manufacturers that have the capacity to develop tooling and make the pouch. The next step is to license the pouch and other products to the Procter & Gambles of the world.

Therein lies the key to his company's future. By licensing rather than selling products like the pouch, AT will have real assets and ongoing revenue streams. "We're looking for the pouch alone to take us to $20 million," he says. "The potential for the whole company is to be a $100-million-plus business."

The company's first partnership agreement, with global plastics manufacturer PTI Plastics Inc., is already in place. One more such deal and Verheem will be ready to launch a new round of fund-raising. "I would like to raise $2.5 million and develop tooling for four different models of pouches by the end of 2000," he says.

How can Verheem be so confident so soon? Because he was developing the model long before he actually decided to start the company. The concept itself dates back more than a year, to when Verheem was earning his M.B.A. at night while working days at Guthy-Renker. His job was to scout for products that would sell well on television. That meant meeting inventors with all kinds of crazy ideas.

One was Kurt Koptis, who already had scored a winning product on his own: a spackle in a squeeze applicator that was sold under the name Nail Hole Filler. Koptis brought Verheem some items that didn't seem right for Guthy-Renker, which wanted only the most obvious slam-dunk, turnkey products. But the two men got to talking and discovered they shared common interests and views about product development. "Unlike many others, Kurt knew he was in the packaging business," Verheem says.

In July 1998, Koptis called Verheem and said, "I have a really cool product."

"Kurt showed me the early form of the pouch and said, 'This is perfect for putting butter in," Verheem recalls. "He wanted to sell it to Wesson Oil, but I immediately saw the potential for medications." Verheem told Koptis he would develop the pouch concept as a project for a business-plan class he was taking in the fall -- a class taught by De Noble. That way, they could do some research on the market potential and get good advice from students and professors.

The grade for a class like that is based on teamwork, and Verheem already knew the person he wanted to work with. In an earlier class he'd been partners with a young woman named Natasha King, herself an ÉmigrÉ from the UK. King, a market-research specialist, had impressed him with her intellect and drive -- as well as her irreverent, firebrand personality.

Competitive with others, demanding of themselves, King and Verheem worked well together, speaking in the sort of shorthand that usually takes many years to develop. During the fall of 1998 they built a model for bringing the pouch to market. They discovered that packaging alone is an $80-billion industry. Through his Guthy-Renker experience and contacts, Verheem identified manufacturers that could be potential customers, and strategic partners that could help make the pouch. King did the early market research.

In December, Verheem and King, both excellent students accustomed to earning straight A's, pulled an all-nighter and finished their business plan. De Noble gave it a B-minus. It was the lowest grade either teammate had ever received. Of course, now that De Noble is a board member of and an equity participant in AT, King won't let him live it down. "I'll never forget it," she says.

Apparently, neither will De Noble. He roars with chagrined laughter when the subject comes up. "I'm going to go down like the professor who gave Fred Smith a C," he says, recalling the infamously bad reception the plan for FedEx got in business school. Still, he defends his decision. "The grade was for the plan itself, not for the business," he says. "The plan did not articulate the vision well. It needed work. B-minus."

De Noble loved the vision, if not the plan, and he proved it. He chose Verheem and King to represent his department and SDSU in one student business-plan competition after another. Verheem and King kept shifting their model according to input they got from the venture capitalists and other experts who served as contest judges. In the end, though, they kept returning to their original concept. "The B-minus plan," says King, now marketing manager for AT. "It's back."

Verheem signed a sizable percentage of the company over to Koptis in return for rights to some of his other inventions, including the Appli-Can, a spray container with a brush molded into the cap. As a container for cleaning products, the Appli-Can is already on the shelves in hardware and auto-parts stores across the country. Koptis introduced Verheem to his angel, a Palm Springs investor named Dave Williams, who ended up providing Verheem with $450,000 in seed capital.

The rights to Koptis's patents alone gave AT an immediate revenue stream that is now better than $30,000 a month. "The beauty of that is that it releases the pressure of having to go out and raise money right now," says De Noble. "It gives Johann breathing room. Now he can build a base for the business so that when he does go out to raise money, he will be in a strong negotiating position. He won't have to give up a lot of equity."

As for an exit strategy, Verheem believes that in three to five years, AT might be ripe for an initial public offering or acquisition. Whether the company succeeds or fails, he'll know it was done his way. "People do this, take this step, to gain freedom and to succeed at the game," he says. "You're not really playing if you work for someone else. Your own ass has to be on the line."

If AT flies, then he and Emmarance can have the life they dream of in their adopted country. They'll move across the highway, from East Del Mar into one of those little expensive houses right on the beach they love. They'll be able to spend a few months a year home in South Africa, so their new son, Christopher, will learn about his roots and the culture of their birth. And as sure as it don't rain in Southern California, Verheem will pursue his next big challenge.

FINANCING: $450,000 from an angel investor; seeking an additional $2.5 million to bring products to market

PROJECTIONS: $30 million within four years

HURDLES: Although the company has taken steps to lock down utility patents to protect the pouch, it needs to get market share quickly or it won't have as strong a legal position when it comes time to fight knockoffs. Other hurdles: developing the product and the manufacturing process, raising more capital, and selling to giant consumer-products companies

PERSONAL FUNDS INVESTED: $10,000

EQUITY HELD: 20%

SALARY: $100,000-plus

PREVIOUS JOB: Director of product development at the world's leading infomercial marketer, Guthy-Renker

SOURCE OF IDEA: A meeting with an inventor, and a class project in business school

LAST VACATION: A week last spring at Yosemite and Big Bear Lake, where there were no phones. At press time Verheem was planning a two-week vacation to show the baby to his family and friends in South Africa.

WHY HE'D QUIT: "When there is no more excitement in what I am doing. In a start-up that just does not happen," Verheem says.

WHAT HE LOSES SLEEP OVER: "Virtually nothing," says Verheem, who sleeps a solid seven hours a night. Part of the reason is that he didn't jump at the decision to start a business. He developed it over a nine-month period and didn't make the move until all the important pieces were in place.

WHAT HE'D BE DOING IF HE WEREN'T DOING THIS: "Either making wildlife movies in South Africa or taking the plunge with an Internet start-up."

SOURCE OF INSPIRATION: "Very successful entrepreneurs who have blazed the way. And my family."

ROLE MODEL: Robert Leonard, cofounder of Ticketmaster. "When Leonard started Ticketmaster, the field was dominated by Ticketron. Everybody told him he couldn't compete. But he insisted, saying his business model was better than theirs. Because it was, he basically drove Ticketron out of business and acquired it in 1991."